Will Russia join the OPEC decision to limit oil output?

Russia feels comfortable with the situation in the global oil market. As a result, it will likely continue its policy of a relatively weak ruble and a gradual increase of its oil output.

The decrease in global oil prices, which started in part as a result of the shale revolution, has become the real curse of the OPEC members. Photo: Shutterstock

The Organization of the Petroleum Exporting Countries (OPEC), which consists of states that produce about one-third of crude oil globally, suffers from several structural problems that it has been unable to solve for over 50 years now.

First, OPEC’s share in global oil output is consistently decreasing, which makes all attempts by its member states to influence the global oil market look less than convincing. Second, there is a clear lack of trust among OPEC members. They are convinced that the global oil market works according to “zero sum” logic, where the gains of a partner lead to your own loss. And finally, OPEC member states have different levels of economic development, different priorities in the area of international security and a diverse perception of threats to their stable development.

All attempts to govern the group of 12 diverse states, which are even situated in different parts of the world, look like herding cats: To keep them together in one group and make them obey has never been truly successful.

The decrease in global oil prices, which started in part as a result of the shale revolution, has become the real curse of the OPEC members, although each of them suffers from it differently. Interestingly, the current crisis did not unite them, but only split them further. It also added more divisions between them and the major oil producers that are not a part of the cartel, although they have been willing to join OPEC and have been cooperating with it for decades. Russia is one of those states.

The Russian government is well-aware of OPEC’s inability to fulfill its promises to limit oil production and its supply to the global markets. During hard times there is an additional issue on top of the low oil prices – the struggle to maintain regional market share, which results in the clash of interests of the oil exporting countries.

In addition, the global oil market is affected by medium- and long-term processes that drive the oil price up or down within a broad range. In times of rapid global economic growth, the price of oil increases, while during economic crises it drops. In addition, technological advances and changes (shale revolution, increasing usage of energy-saving technologies, alternative energy sources, etc.) also influence the oil price.

Current efforts undertaken by the Russian authorities and state-controlled oil companies aimed at limiting the country’s oil exports and influencing the global oil price do not look conclusive at all. Naturally, the “verbal interventions” of Russian President Vladimir Putin and Energy Minister Alexander Novak in support of the oil price have some limited impact on the actual oil price, but they are unable to change fundamental trends. In fact, those fundamental trends are quite favorable for Russia as a major oil-producing country.

First, the impact of the shale revolution on the global market has been successfully limited. Shale oil production is currently decreasing and those exports that are coming into the market conveniently replace the decreasing oil exports of countries where oil output is declining (for example, in the UK and Norway).

Second, the long-term trend of rising oil consumption and increasing demand for it in the rapidly developing countries of Asia and Latin America is still in place. The rise in global demand for oil is the most important specific factor that maintains the current oil price and enables it to drift upward in the medium term. For this reason, the verbal promises of the leading oil-producing countries to freeze oil output and exports are based on the long-term trend of rising demand for oil.

And finally, the recent statement of Rosneft head Igor Sechin that the company has no reason to join OPEC's decision to freeze oil output and exports can be explained by the very unique nature of the situation in Russia. Acting in the spirit of the “zero-sum game,” Russia wants to preserve its share in the global oil market, which makes it objectively not interested in limiting its oil production, as it will be immediately replaced by that of competitors.

Russia, unlike the other OPEC members, hasn’t put oil production under full state control. This is why oil companies formally independent from the state (and Rosneft is one of them) can come up with statements different from those of the country’s leadership. However, it is hard to believe that there is a real debate between Sechin and Novak, although formally the government is concerned about the oil price, while the private sector company Rosneft is worried about its share of the oil market.

The chances that Russia, acting together with OPEC member states, will limit oil output are extremely low because of the above-mentioned fundamental reasons. The Russian authorities found a healthy balance between a relatively weak ruble, which is needed to support the nation’s import substitution policy, and sufficient revenue from oil exports, which in general allows them to keep the current budget balanced.

This is why expectations of any ruble appreciation against other world currencies are quite unjustified. In the beginning of 2016 Russia’s Central Bank defined a healthy U.S. dollar/ruble exchange rate at 63 rubles for one U.S. dollar, and over the course of the year, it doesn’t want to change that.

All the controversial statements coming from the Russian authorities indicate that the Kremlin feels comfortable with the current situation in the oil market. The current price in the $45-$55 range absolutely suits the Russian economy and its oil companies. This is why Russia’s policy of a relatively weak ruble and a gradual increase of oil output (which hit a record in 2015) will continue.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.

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Stanislav Tkachenko is a professor in the International Relations Department of St. Petersburg State University (Russia) and a visiting professor at Bologna University (Italy). He currently serves as the president of the Post-Communist States in International Relations Department at the International Studies Association (ISA). Tkachenko holds a doctoral degree in economics and has written seven books on political economy and Russian economics, as well as more than 200 articles.